Brady Violation Allows Defendants to "Squawk" Away

United Statesv v. Mahaffy, No. 09-5349-cr (2d Cir. August 2, 2012) (McLaughlin, Parker, Wesley, CJJ) 

This, the court’s most recent Brady decision, presents a truly shocking instance of prosecutorial misconduct.

Factual Background

The Brady violation was here was  straightforward: the defendants were employees of brokerage houses and a day trading firm called A.B. Watley, accused of securities fraud by running a “frontrunning” scheme. Here’s how it worked: the brokerage houses had “squawk boxes” which, during the day, would transmit internal communications about, amongst other things, client trading orders. The squawks would allow the firms’ traders to find a client to take the other side of the trade. In the scheme, the brokerage defendants would place phone receivers over their squawk boxes and transmit the squawks directly to Watley employees, who would then place trades in the squawked securities before the brokerage houses could execute the customer orders. Watley hoped to buy or sell at a more favorable price than would be available once the squawked orders were executed. The payback would be “wash trades” - Watley traders would simultaneously buy or sell the same securities at the same price and place the orders through the brokerage house that provided the squawk. These trades had no economic upside or risk, but generated commissions for the defendants in the brokerage houses. 

The defendants were first tried on a variety of securities-fraud related offenses and were acquitted of all but one of them; the jury hung on a single count of conspiracy to commit securities fraud. The government retried the defendants on this single count, which was predicated on two theories - property fraud, because the brokerage defendants allegedly deprived their employers of confidential information, and honest services fraud.

Most of the trial action centered on whether the squawks were indeed confidential information. Principals from each brokerage firm testified that the firms regarded the client order information contained in the squawks as confidential information that the brokers should not have disseminated to Watley.  After another near-deadlock, the jury convicted.

The Brady Violation

Before the first trial, during a parallel SEC investigation, high-level members of the brokerage houses testified in depositions that the information in the squawks was not confidential, was not treated as confidential, and that there were good business reasons for this. The government clearly knew about these depositions: the primary SEC attorney who conducted them was a “Special AUSA” who sat at counsel table during the first trial. He even emailed his colleagues on the trial team about the need to disclose the transcripts to the defense as Brady material, but the trial prosecutors decided not to.  A different trial team conducted the retrial; it too knew of the transcripts but deferred to the first trial team’s decision not to disclose them.

The government finally disclosed the transcripts after the defendants had been sentenced. This prompted the defendants to move for a new trial under Rule 33, which the district court denied. 

The Circuit’s Decision

The circuit clearly saw the importance the withheld exculpatory material and, in a strongly worded opinion, vacated the convictions and remanded. The court also suggested that it would not be wise to retry these defendants a third time.

The opinion has a long and detailed explanation of how and why the withheld material was material to the defense - here are a few highlights, although the opinion details many more:

- A Merrill Lynch employee had testified at trial that Merrill did not allow direct feeds from its squawk boxes to individuals outside the firm. But his supervisor testified in his SEC deposition that squawked information would be “spread or be out in the marketplace or broader” and was then “no longer confidential.” Two other Merrill supervisors told the SEC that there was no difference between holding a phone up to the squawk box and repeating the information in the squawk “word for word” and that there was no rule “that said you could not broadcast that information.”

- A Smith Barney employee testified that the firm’s squawks were “sensitive, not confidential,” since at some point someone would have to act on the order. 

- A Lehman supervisor did not view squawks as confidential, either. Their purpose was to facilitate the communication of information,  including to “our customer base.”

In trying to defend itself, the government, as it usually does in such cases, trotted out every pathetic Brady excuse it could cobble together. The circuit shot them all down:

1. The government: the withheld information was not really exculpatory.  The circuit: It does not matter that some potions of the transcripts might have been inculpatory. Since the exculpatory part “harmonized with the theory of the defense case,” there was a Brady violation.

2. The government: the witnesses whose testimony helped the defense were "mistaken." The circuit: even if mistaken on some points, the testimony was still material. The witnesses clearly testified that there was “no policy against directly transmitting squawks.”  This particular excuse, by the way, is a variant on the classic "we did not believe the testimony, so we did not have to disclose it." The circuit has debunked that so many times that it is truly a wonder that the government still bothers with it.

3. The government: the testimony was “irrelevant hearsay” that would have “confused the jury and wasted time.” The circuit: it does not matter that some of the specific evidence that the government withheld might have been inadmissible, as long it could have led to admissible evidence. If necessary, the defense could have called the witnesses themselves.

4. The government: for one of the depositions, the defense already knew that the witness had had the conversation that turned out to be exculpatory. The circuit: that does not matter. It is not enough that the defense know a potential witness’ identity - the potentially exculpatory testimony is still deemed suppressed if a defendant did not know “the essential facts permitting him to take advantage of any exculpatory evidence.” Here, the defendants did not know what that witness said to the SEC under oath. If they had, they might have called the witness himself. 

5. The government: for another one of the witnesses, the withheld deposition was immaterial because it related to that witness’ conversation with one of the defendants, who ought to have known the substance of their conversation.  The circuit: again, it does not matter, because the defendant could not have known what the witness told the SEC under oath. 

6. The government: the Smith Barney witness simply avoided the word “confidential” in favor of the word “sensitive,” because he was trying to avoid misusing a legal term. The circuit: that witness’ testimony went beyond his avoiding the use of the term legal “confidential.” His factual testimony about how the firm treated the information suggested that the firm did not treat the information in the squawks as confidential, and was thus material to the defense. 

In sum, since the withheld testimony “strongly suggests that the brokerage firms did not treat squawked ... information as confidential and that senor employees and management at the respective firms did not bar the transmission of squawks or take steps to maintain exclusive control of pending block order information,” it should have been disclosed. And the court had “little confidence” that the result of the trial “would have been the same had the government complied with its Brady obligations.”

Finally, an interesting footnote on forfeiture.  The district court ordered forfeiture of the gross commissions that Watley paid to each brokerage defendant’s employer. But the defendants only kept about thirty per cent of those payments. Accordingly, the district court erred in ordering forfeiture of the full amount. The proper amount to be forfeited should have been only each defendant’s “net, not gross, gain.”

Mea Exculpa

United States v. Spadoni, No. 06-4970-cr (2d Cir. September 25, 2008) (Pooler, Hall, CJJ, Gleeson, DJ)

Here, the defendant successfully argued that the government’s suppression of exculpatory and impeachment material warranted a new trial.

Background

Spadoni was the general counsel for an investment firm, Triumph, that did business with the State of Connecticut. He was a friend of Paul Silvester, who was, for a time, Connecticut State Treasurer. One of Silvester’s duties was to make investment decisions for state pension funds.

In 1998, Silvester asked Spadoni for a campaign donation. By law it could not go to his own campaign, so instead Spadoni donated $100,000 to the state Republican Party. Silvester lost the election, but before he left office decided to invest $150 million in state pension funds with Triumph.

In connection with this investment, Silvester asked Spadoni to pay a one percent finders fee to two of his associates, even though they had not acted as finders. As their discussions on this arrangement progressed, Silvester decided to increase the investment from $150 million to $200 million, to increase the amount of the fee.

Silvester executed the investment contract with Triumph on November 12, 1998. At some point, Silvester’s associates entered into “consulting contracts” with Triumph that would pay each of them $1,000,000 over three years. These were sham contracts that required neither duties nor results.

In connection with these “consulting contracts,” Spadoni was convicted of bribery and mail fraud, as well as racketeering and racketeering conspiracy.

After trial, Spadoni’s attorney obtained from Silvester a set of notes that Silvester had handwritten for his own attorneys, to assist them in negotiating a plea. The notes had also been typewritten verbatim by the attorney’s office. Silvester’s attorney met with the government in an attorney proffer and gave the government the substance of Silvester’s notes. In addition, Silvester gave the same information to the government when he began cooperating. Silvester's notes detailed additional public corruption by Silvester, but also contained an account of his interaction with Spadoni over the “consulting contracts” that was at odds with his own trial testimony.

In response to Spadoni’s post-trial Brady motion, the government, for the first time, produced notes that an FBI agent had taken at the time of the attorney proffer.


The Appeal

On appeal, the circuit ordered a new trial on all counts relating to the “consulting contracts” based on the government’s Brady/Giglio violation. While the government never had Silvester’s own notes, it had the agent’s proffer notes, and did not turn them over until after trial. The circuit, unlike the district court, found those notes to be “materially inconsistent” with Silvester’s trial testimony.

Those notes supported an alternative version of the Silvester-Spadoni conversation about the consulting contracts that was “entirely at odds” with the government’s theory of the case. Indeed those notes indicated that, contrary Silvester’s trial testimony, when he and Spadoni first discussed the finder’s fee proposal, Spadoni had declined to make payments that would amount to a bribe. The notes thus would have been quite useful to Spadoni, who could have used them both to impeach Silvester and to support Spadoni’s own version of their conversation.

The notes were thus “directly relevant” to the intent element of the consulting contract bribery charges. And, apart from Silvester’s testimony, the evidence regarding Spadoni’s intent was “far from overwhelming.” The court concluded that “there is a reasonable probability that if the government had not inexplicably withheld ... the proffer notes, the jury would have harbored a reasonable doubt about Spadoni’s guilt.”

Government’s “Question[able],” “Troub[ling]” and “Disingenous” Conduct Results in an Affirmance. Huh?

United States v. Blech, No 05-3600-cr (2d Cir. April 23, 2008) (Sotomayor, Parker, Hall, CJJ).

Two defendants who were convicted of securities and related frauds appealed on the ground that their cases were misjoined, and one advanced a Brady claim. The court affirmed, but only out of apparent deference to the district court’s findings under the “abuse of discretion” standard.

The Severance Issue

This case went to trial on a thirteen-count indictment that alleged two separate fraud schemes. The first involved appellant Brandon, who, along with others, defrauded customers of Credit Bancorp of more than $200,000,000. The second scheme involved appellant Wexler, who also defrauded Credit Bancorp customers, but in a different way. The district court denied their severance motions, and both were convicted.

The defendants’ severance claim was unusually strong. Although the two schemes shared some participants, and both targeted Credit Bancorp customers, they were otherwise completely distinct. Nevertheless, the appellate court found no error.

The court held that the joinder was permissible under Rule 8(b), even though the two schemes were not - and could not - have been charged as a single conspiracy. Rule 8(b) was still satisfied because the indictment alleged a sufficient overlap in parties and transactions. Nor were the defendants prejudiced by the joinder; the court cited the small risk of “spillover prejudice” and the district court’s limiting instructions.

Nevertheless, the court noted, “[W]e question the government’s decision to try the two conspiracies together.” Neither defendant knew of the other’s activities, it did not appear that one scheme would have been admissible background evidence during the trial of the other had they been severed, and the government unfairly “lump[ed] together all of the conspirators during its rebuttal summation.” So why did it affirm? The district court did not abuse its discretion “given the flexibility of the standard.”

The Brady Claim

Many, many months before trial, the government produced more than two hundred boxes of discovery. One week before trial, it provided to defendant Brandon exculpatory information - the grand jury testimony of a cooperating witness. It waited until the eve of trial to turn over even more Brady material - the FBI agent’s notes of that cooperator’s debriefing. These materials supported Brandon’s claim that he was unaware of the unlawful aims of the conspiracy with which he was charged.

Nevertheless, the circuit found no Brady violation, even though the government “disingenuous[ly]” argued that the material was not exculpatory. In fact, the court concluded that the evidence “quite obviously could be viewed as” favorable to Brandon. The government also disingenuously argued that the evidence was not exculpatory because there was other evidence of guilt, another ridiculous assertion that the court rejected.

But it still affirmed, because the district court found no bad faith (it seems that, here, the government reserved its bad faith for its appellate briefs), and “we do not go to far as to overturn that conclusion.” The court also noted that there was “no probability” that the late disclosure affected the outcome of Brandon’s case. It did provide, however, a stern warning that the government “should have” complied with Brady, but that, of course, gets Brandon nowhere.

Comment

Enough of the free passes! If the court is really serious about curtailing such sharp practice on the part of the government, it needs to start reversing convictions in cases like this.